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Why Palladium May Be This Year's Gold


The auto industry is driving demand, but limited availability constricts supply.

Other Ways to Invest in Palladium

Investors looking for exposure to palladium have a couple of different options. Those looking for direct exposure may want to consider exchange-traded funds (ETFs) or exchange-traded notes (ETNs) that hold physical palladium, while palladium mining companies offer exposure to the commodity with the potential upside or downside of exploration activities.

The most popular ETF is ETF Securities' ETFS Physical Palladium Shares ETF (NYSEARCA:PALL), which offers a simple, cost-efficient, and secure way to benefit from higher palladium prices, since physical metals instead of futures contracts and derivatives back the fund. With a 0.60% management fee, the ETF is also relatively affordable compared to other non-index funds.

There are many mining companies with exposure to palladium, but most of them are involved in extracting other precious metals, too. Investors should be aware that these equities might entail more risk than palladium ETFs, since companies can experience bankruptcy, while they tend to track the price of palladium with a strong correlation in spot price movements.

Some of the more popular equity plays on palladium include the following:
  • Stillwater Mining Company (NYSE:SWC) is a $1.5 billion producer of palladium, platinum and associated metals from a geological formation in south-central Montana, the J-M Reef, and from the recycling of spent catalytic converters.
  • North American Palladium Ltd. (NYSEAMEX:PAL) is one of the world's two major palladium producers that operates the
    flagship Lac des Iles Mine (LDI) located in Ontario, Canada with a market capitalization of nearly $210 million.

  • Anglo American Platinum Ltd. (PINK:AGPPY) is the world's leading primary producer of platinum group metals, including palladium, with a market capitalization of $13.6 billion and properties around the world.
Investment Strategies to Consider

There are many different strategies that investors can employ to take a position in palladium and benefit from higher prices. From equity ETFs to mining equities to futures contracts, there are a number of different securities that can be used to invest in commodities. These securities can be further leveraged with innovative derivative strategies.

Derivatives can also be useful in leveraging returns or implementing various strategies. Investors looking for long-term exposure at a cheap price may want to consider LEAPS – or long-term equity anticipation securities – while conservative investors may want to consider initiating a covered call option position to generate an income and lower the breakeven point.

The Bottom Line

Palladium could benefit from increasing demand and a limited supply throughout 2013, continuing many trends that began in 2012. Investors looking to capitalize on these moves have a number of different options, ranging from equity ETFs to commodity futures, as well as access to a number of different strategies involving futures and options.

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Editor's note: This article by Justin Kuepper was originally published on Commodity HQ.
No positions in stocks mentioned.
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